Good headlines aren't enough

January job growth could be misleadingly high

WASHINGTON (CBS.MW) -- The two biggest economic indicators of the month will probably look pretty good, but they won't provide much joy on Wall Street.

The pessimism among investors has gotten to the point that the markets need more than good headlines from the manufacturing sector and the labor market. They also need a better fix on what the risks and rewards of war against Iraq will be.

In the coming week, the economic calendar will be dominated by the January employment report on Friday and the January survey from the Institute for Supply Management on Monday.

The geopolitical calendar will be dominated by Wednesday's U.N. Security Council meeting, where Secretary of State Colin Powell is expected to supply evidence that Iraq continues to possess and develop weapons of mass destruction.

Powell's appearance will shape the contours of the coming war, helping to determine if Western Europe is on board or on the sidelines.

Given the life and death stakes at the U.N., it's not surprising that the statistics would be pushed into the shadows this week.

Iraq may be on Wall Street's mind, but it's jobs that Main Street worries most about. Decent job growth would go a long way to improve the mood of the glum consumer.

On the surface, the nonfarm payroll data might provide just the reassurance that consumers crave. Economists now expect that U.S. companies added about 64,000 jobs in January.

Any growth would be good news in an economy that eliminated 181,000 jobs in 2002 and 1.4 million in 2001.

On second look, however, "the data should make it fairly obvious that the labor market continues to sag," said Joe Abate, economist at Lehman Brothers.

The gains in January probably weren't real; they're only an illusion created by the way the government adjusts for seasonal factors.

When retailers realized that the holiday season would be slow, they didn't hire their usual seasonal help. And since they weren't hired in November and December, they weren't laid off in January, as the adjustment factors "expect."

In the government statistics, that translates into job losses of 88,000 in November and 101,000 in December and a corresponding pickup in January.

"Really, we'll have three months of flat job numbers," said John Ryding, chief market economist at Bear Stearns. Ryding is expecting a gain of 110,000 in January's payroll numbers.

Flat over the past three months would be good news, because it would mean that "payrolls didn't decline in any meaningful way" over the holiday season, Ryding said.

There are some indications that the jobs market is slowly recuperating. Initial jobless claims have been falling toward the 350,000 weekly level that Ryding says would begin to bring down the jobless rate, now at 6 percent. Temporary jobs are increasing along with the average workweek; both are signs that the slack is disappearing.

Employment in the manufacturing sector is still falling, but the average workweek grew in December. There's hope that factories can pull through the soft patch and begin to increase output and jobs.

The ISM index has been above benchmark 50 percent line in 10 of the past 11 months. In December, it matched a 2 1/2 year high of 55.2 percent. Anything over 50 percent indicates expansion in the factory sector.

Economists say the ISM index will probably ease to about 53.7 percent in January, arguing that the ISM got ahead of the regional manufacturing surveys from the Federal Reserve banks.

"We are looking at a broad-based expansion," Ryding said.

Ryding is persuaded that the economy is slowly improving. Like the Federal Reserve, he believes that growth will resume once the uncertainties of Iraq are cleared up.

With demand from businesses picking up incrementally and productivity growth slowing, "corporations are needing to do a bit of hiring," Ryding said.

Others aren't so sure that consumers and businesses are waiting for the all-clear signal from Baghdad.

"Our own view is that war fears are not a major reason for why the economy is soft," said Jan Hatzius, economist at Goldman Sachs. "It simply isn't plausible that households or firms are retrenching because there could be a war halfway around the world, a war in which the United States is expected to prevail quite easily."

"Instead, we think the ongoing balance sheet adjustments among households, corporations, and state and local governments following the equity bubble's demise are much more important," Hatzius said.

Far from expecting a post-war rebound, Morgan Stanley's chief global pessimist-or-is-it-economist Stephen Roach worries that the war could provide the shock that would push the fragile U.S. economy back into recession.

"There can be no mistaking the decided loss of momentum in the U.S. economy," Roach said.

The increase in oil prices is already comparable to the 1990 pre-war spike, Roach said. The colder weather and higher prices for heating oil and gasoline have imposed a $50 a month tax on the typical household, said Lehman's Abate.

"In many respects, today's post-bubble U.S. economy is in far worse shape than the economy was back in 1990," Roach said.

Consumer spending slowed to a 1 percent annual pace in the fourth quarter. Most of the significant sources of extra spending money are fading away, including the wave of mortgage refinancings.

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